Monday, July 28, 2008

Markets versus Capitalism?

Is there something different to debate when considering a market economy and a capitalist economy? This is the question posed by Tim Worstall on the Adam Smith Institute’s Blog this morning (HERE).

Tim asks the question because he is discussing: ‘Comparing the Costs of Communism’, using Finland and Estonia as the cases for study, because they were quite similar in their living standards in 1939 and 50 years later in 1994 they weren’t; Estonia for much of the 50 years had been a Soviet satellite and occupied country with all the trappings of a communist command economy, and Finland, while living under the shadow of the Soviet Union, had ‘remained a market economy’ with, however, a fair degree of state control.

Tim Worstall writes:

‘But Finland was far from being a rip-roaringly capitalist economy over those years: it wasn't particularly intellectually free either, and the economy was quite closely aligned with that of the Soviet Union as well. The important point was this:Despite close relations with the Soviet Union, Finland remained a market economy...

By leaving voluntary exchange unchecked, by having a price system that could inform on the allocation of resources, after only 50 ish years the place was creating three times as much wealth per head for the people to share than the place which did not retain those options.

I've said before here that capitalism and markets are two very different things: the former is a description of a method of ownership, the latter a description of a method of exchange. I've also said that if we were only able to retain one of the two I would unhesitatingly pick keeping the markets and capitalism can go hang. Finland during the post war years wasn't all that capitalist a place but it was indeed a market economy and the comparson here wth Estonia simply reinforces that belief of mine.’

CommentI am often commenting on people’s assertion that Adam Smith wrote about capitalism and using the illustrative point that he never mentioned the word ‘capitalism’ as it was not invented in English until its use in 1854 by Makepeace Thackeray in his novel the Newcomes (Smith died in 1790).

Wealth Of Nations was not about capitalism; it was about a commercial economy, then prevalent in the 18th century Britain, a mainly agricultural economy (nearly 50 per cent of what we call the GDP) with shops, market stalls, small workshops, artisans of various types and skills, and manufacturing activities that were mainly driven by hand power and not steam or electric power. It had a thriving international trade but these were relatively small sailing ships, supported inland by abysmal roads and a few canals.

It was the commercial market economy that drove the country towards the spread of opulence, and Smith saw the possibilities if the existing markets were kept free of interference by politicians, who thought they knew better than the price system, and by ‘merchants and manufacturers’, who saw personal gains from widening the market, narrowing the competition and raising their prices. But despite these interferences, some dire, many minor, the inner strength of markets continued to work for economic growth.

Hence, I don’t feel the need for particular affection for modern day capitalism. I am happy to see scores of senior executives caught with their hands in the till, alongside shifty politicians, and each big fine or jail sentence imposed is a cause of celebration – justice works! – and is not a sign of the ‘system’ collapsing, nor a need for more regulation, because strong laws and a willingness to implement them is enough for a free society.

I do feel and see a need for extending and deepening markets into further aspects of society; Smith favoured public-sector funding of projects to ‘facilitate commerce’ and he was pragmatic about whether public or private sectors managed the projects, preferring to make that decision on the pragmatic grounds of which management demonstrably worked best, even experimenting with some sites (in his case toll roads) managed by ‘Public Commissioners’ and some by Private Commercial bodies and then letting performance be the judge (though it's easier to sack poor private sector performers than poor perfoming public servants). The obsession of every-size-fits all in these issues is a triumph of ideology over good sense. Let people bid to manage local public services.

So the choice between capitalism and markets is unlikely to be agenda; unfortunately the choice between state-regulated and managed economies and markets is ever present. Here, we can take sides with enthusiasm. I favour extending markets at every opportunity.

With socialism off the agenda for now (except for those from the Left buried within the ‘climate change’ consensus, for which consensus I am not enthusiastic at all), the battle lines are drawn with the job seekers among regulators, quangocracy and public commissions on one side, and the exponents of free markets on the other.